Traveling and volunteering are both great ways to spend your golden years. But some seniors are more interested in starting the businesses they've always dreamed of founding. Donning a small business owner's hat later in life can be rewarding, but it comes with a certain degree of risk.
Before you get started, it's a good idea to consider the following financial tips.
1. Evaluate your savings
Starting a business in retirement can give you the chance to pursue your passions. And if it's profitable, you'll have an additional source of income. But until your business takes off, you'll need to have enough money to pay your bills and cover other expenses.
That's why it's important to consider whether your Social Security benefits and your retirement savings can absorb the various costs that'll come up while you're building your business. If your nest egg isn't large enough, getting your company off the ground might be difficult.
2. Review your budget
In order to know how far your savings can stretch, you'll need to know how much you're spending each month. If you haven't looked over your budget in a while, it's a good idea to go over it with a fine-tooth comb. You'll need to look out for any expenses that you can reduce or cut out altogether to minimize the amount of cash that's flowing out of your account.
If you're still paying off your mortgage, your student loans or your credit cards, it's best to ditch that debt as soon as possible. By eliminating that debt, you'll save on interest and you'll have more money to put toward your day-to-day expenses. If you can streamline your spending, it'll be easier to start a new business in retirement.
3. Figure out the financing
If you're wary about putting your retirement savings on the line to fund your business, you'll need to weigh your financing options. Some grant programs offer startup money to seniors. Unlike loans, grants typically don't have to be repaid (although you might have to meet other requirements).
Once you've exhausted your grant options, you can start looking at ways to borrow the money you need. Small business loans, small business credit cards, personal loans or home equity loans are all viable funding opportunities. Before you fill out an application though, it's important to do some research.
Small business loans may require collateral or a personal guarantee. That means you may have to put your personal assets on the line in order to borrow money. If you default on your loans, your lender could take over your bank accounts, your property or other assets of yours.
4. Don’t forget your tax filing
It's great when your small business starts turning a profit right away. But you'll need to be mindful of how that will affect your tax liability. If you're operating as a sole proprietor, for example, you'll report your business income on your personal tax return. If the business is generating a decent chunk of change, you may have to reduce your retirement withdrawals. Otherwise, reporting a higher income could push you into a higher tax bracket.
You'll also need to adjust your tax filing schedule. While sole proprietorships and partnerships are required to file their income tax returns annually, they're also responsible for making estimated tax payments four times a year. If you miss a payment deadline or you underpay, the IRS could hit you with a penalty.
Starting a business in retirement isn't something you want to rush into. It's important to map out the different financial aspects of becoming a business owner before you get going. That way, you can protect the assets you've worked so hard to save.